Monday, December 21, 2009

Buy Low/Sell High Still Best Way to Make $7 Billion

The WSJ reports today that David Tepper's hedge fund Appaloosa was the big winner this year in the competitive world of hedge funds. Appaloosa managed to eke out gains of 120%, which amounted to over $7 billion in profits this year. Even taking into account Appaloosa's lousy 2008, where it punted 25%, a 120% return is amazing. What complicated strategy did Mr. Tepper employ? Surely something involving derivatives, structured something or others, hedged against CDS. Nah. He just bought the low. He bought some Bank of America while it was trading below $3 and Citi when it dipped below $1. He kept buying and buying bank stocks, preferred shares and bank debt, even though at times in the depths of the market's misery in February and March, it seemed as if he was the only one buying. While rumors of bank nationalization floated around earlier in the year, investors dumped bank stocks for fear that shareholders would be wiped out, much like in the case of the conservatorships of Fannie and Freddie. However, Mr. Tepper steadfastly held onto his belief that the government would do nothing of the sort. After all, Geithner promised to prop up the banking sector by injecting additional capital and the Fed swore it would take drastic measures to pump free money into the economy. It seemed only logical that we would avert a Great Depression. He didn't understand why government officials would lie about this type of thing, so he just kept buying. And then he rode the rally all the way up.

Market volatility of the kind we've seen in the past couple of years always produces a couple of huge winners. John Paulson emerged as the big winner on the short side as the market imploded, with his prescient shorting of subprime, while Tepper is being crowned king of the long side on the way up. It's usually never the same guy who outperforms in both directions, which is why I personally find Mr. Paulson's returns to be far more impressive so far. Not only did he short financials and produce spectacular returns, but he's had decent returns this year as he was also a big buyer of bank stocks earlier in the year.

Regardless, Mr. Tepper deserves his time in the limelight as the reigning hedge fund master of 2009. Certainly the folks at Carnegie Mellon will be calling him soon. The business school of Carnegie Mellon is named after Mr. Tepper since his $55 million donation in 2004. Although generous to his alma mater, Mr. Tepper still lives in the same two-story home he purchased in 1990 for $1.2 million. And if you discount the fact that he owns a brass replica of a pair of nuts that he likes to rub for luck during the trading day, he doesn't sound like your run-of-the-mill mega-rich hedge fund clown.

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